Banks Get a Little Breathing Room: The Fed Eases Capital Rules (and I Have Thoughts)

The Plot Thickens (and the Capital Thins)

Alright so the Fed decided to ease up on some capital rules for banks. Apparently this Enhanced Supplementary Leverage Ratio (eSLR) has been cramping their style. It's all about how much capital banks need to keep on hand and the Fed's saying 'Hey maybe we were a little too strict.' Classic case of 'measure twice cut once,' or in this case regulate first reconsider later. As I always say 'Success is a lousy teacher. It seduces smart people into thinking they can't lose.' Maybe this easing is a bit of that but let's see what happens.

Treasuries: From Hoarders to Holders?

The idea is that these rules have made banks hesitant to hold Treasuries which are supposed to be the bedrock of the financial system. Now they're hoping to encourage banks to load up on those government bonds. It's like saying 'Hey we're not going to penalize you for investing in America anymore!' Sounds good on paper. Vice Chair Bowman thinks it'll build resilience. I'm thinking 'Innovation is moving so fast that if you don't experiment you're going to get left behind.' Let's hope this experiment doesn't blow up in our faces.

The Dissenters' Corner (and a Dash of Skepticism)

Not everyone's thrilled of course. Governors Kugler and Barr are raising eyebrows saying this might just lead to banks giving out more money to shareholders instead of actually helping the Treasury market. Barr especially is hitting the nail on the head when he says firms will engage in the 'highest return activities available to them'. I mean who can blame them right? But as I know to win big you sometimes have to take big risks. A little risk can make a big return or so I have heard.

Basel Standards: The International Yardstick

Apparently these changes align with something called 'Basel standards.' Sounds fancy doesn't it? It's basically a set of international rules for banks. The goal is to make sure everyone's playing by the same rules globally. Keeps things from going totally off the rails. After all If you can't make it good at least make it look good.

Safety Net or Activity Bind? The Great Debate

The core question here is whether capital requirements should be a safety net or a drag on activity. Regulators want the former but history teaches us that the line between the two can be blurry. In the grand scheme of things it's a bit of a gamble. I once said 'I believe that if you show people the problems and you show them the solutions they will be moved to act.' Here's hoping this move is part of the solution not the problem.

My Two Cents (Plus a Few Billion)

Look I'm not a regulator anymore. I'm just a guy trying to eradicate polio and improve global health. But I know a thing or two about risk and reward. This Fed decision is a calculated risk. Whether it pays off remains to be seen. But one thing's for sure: the world of finance never sleeps and neither do I (mostly because I'm too busy reading about the latest in toilet technology). After all in life you have to keep pushing the boundaries.